Reid Looking At Payroll Tax Increase To Finance Health Care Reform

Harry Reid is seeking to manage the cost of health care reform by adding additional revenue-raisers in the form of taxes on the wealthy.

Majority Leader Harry Reid is considering a plan for higher payroll taxes on the upper-income earners to help finance health care legislation he intends to introduce in the Senate in the next several days, numerous Democratic officials said Wednesday.

These officials said one of the options Reid has had under review would raise the payroll tax that goes to Medicare, but only on income above $250,000 a year. Current law sets the tax at 1.45 percent of income, an amount matched by employers.

It was not known how large an increase Reid, D-Nev., was considering, or whether it would also apply to a company’s portion of the tax. President Barack Obama has said he will not raise taxes on wage earners making less than $250,000.

The House bill has a tax on millionaires to help pay for health care reform, though it does not come from payroll taxes. Previously, the Senate Finance Committee bill was paid for largely through an excise tax on high-end insurance plans. That idea has earned praise from some because the revenues would rise faster than the growth of health care, but others believe it would quickly start to hit the average insurance plan, and middle-class workers – particularly unionized workers – would be impacted.

Harry Reid’s re-election chances hinge on heavy union support, so I wouldn’t be surprised if the payroll tax were to supplant the excise tax entirely.

However, there’s probably room for both. The problem with the Senate Finance Committee bill is in the area of affordability. The subsidies are simply too low. Combining a smaller excise tax with a tax on the highest wage-earners could provide more money for subsidies, which would allow the risk pool to expand and realize the goal of affordable health care access for everyone.

But once that number entered the process, it began guiding the process. Sources on the Hill aren’t really clear how the sum transformed from an estimate of the president’s plan to a hard limit for their plan. Few recall that the original language included the qualifier “around.” Even so, the number stuck. It strengthened the hand of moderates in both chambers and allowed them to create a ceiling. It also seemed clear that if the White House was comfortable with $900 billion, then it wasn’t going to fight to protect the spending in any bill that exceeded that cap, so there was no point in the liberals bothering to push the issue.

The problem is that the number, which was chosen at a point of political weakness for health-care reform and the Obama administration, is too low. Most experts think you need closer to $1.1 trillion for a truly affordable plan. Limiting yourself to $900 billion ensures that the subsidies won’t be quite where you need them to be, and means that virtually every spare dollar has to be spent strengthening them. If you want to add $30 billion to the bill creating coordinated care teams across the country — a project that could transform chronic care in this country and eventually save many times its start-up cost — there’s little budgetary flexibility even if you could find the revenue, because each dollar is in a zero-sum competition with each other dollar so the entire plan comes in under the limit.

The House set their bill under the $900 billion dollar number by focusing on a portion of reform rather than everything. Maybe the Senate can do so as well.